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  • Dakota Worrell

Why the Nest Egg Strategy Doesn't Work Anymore



The subject of retirement has grown into such a confusing, yet emotionally charged issue, it's hard to tell what's real and what's not. You have articles being published reading "America is Minting More Millionaire Retirees Than Ever" while right next to it, you'll find an article titled "Why 80% of Americans Face a Retirement Crisis."


To cut through the word play and really understand what's going on here, you need to know some basic numbers, and understand a basic concept: inflation. In the sections below, I'm going to give a very generalized approach to understanding why I don't believe saving for retirement works, and why actively investing is more effective.


1. How many Americans are retiring with $1,000,000? The answer is roughly 14% - 16% of Americans. To break it down, that's about 1 in ever 6 people in this country. That means 283,000,000 people will retire on less than a million dollars. A million dollars may seem like plenty, but below, I'll show you why it isn't enough.


2. How far does $1,000,000 go? This is where it gets scary. So if you're the one in six Americans who did it all right, and retired with a million in the bank at 66 years old, you still have an average of 16 years left to live. That means your $1,000,000 is the equivalent of $62,500/annually. While that may seem like a number that is easy enough to live on, remember that you are going to have extremely increased medical cost, living cost, children and grandchildren, as well as majorly increased cost of living across the board. Thank you inflation.


3. But wait, what's inflation? I'm really glad you asked, because it's the most important part. Inflation is essentially the measurement of how much the purchasing power of your dollar decreased every year. AKA: if you had $1 in 1960, that same dollar would have been worth $8.11 in 2016. Inflation is estimated to be roughly 3% a year. (Though I suspect it's closer to 4%-5% recently.) If you take the $1,000,000 you saved up, and devalue it by 3% a year... your nest egg is losing $30,000 every single year. What's the value of the $62,500/annually that you have to live off now?


4. If even the millionaires are retiring poor, what's happening to everyone else? Well, here are some stats from the Social Security Administration for 2018:


- Among elderly Social Security beneficiaries, 48% of married couples and 69% of unmarried persons receive 50% or more of their income from Social Security.

- Among elderly Social Security beneficiaries, 21% of married couples and about 44% of unmarried persons rely on Social Security for 90% or more of their income.


For anyone who didn't know, Social Security Income is really not that much money each month.


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So, what's the alternative? This is my point! Thank you for bearing with me! If saving for retirement isn't going to work, what will? Active investing. Passive Income. Automated Systems. All of things will set you up to fare better in retirement than even someone who retires with $1,000,000 cash in the bank. I understand Real Estate, so that is the example I am going to use.


Let's compare these two situations:


A. An american who works from age 20 - 66 (44 years) and retires with $1,000,000 in their bank account.

&

B. An american who buys four rental properties over the course of 10 years, and has monthly cash flow of $4000/month. (This is completely doable.)


1. It seems like the guy with $1,000,000 has more money? Sure, initially, you see that the scenario A. makes $62,500/annually, while B. only makes $48,000/annually, but that's actually deceiving. Remember inflation? While inflation devalues the cash in your bank account every year, it has a different effect on rents. Rent, AKA the cost of housing, increases by the same amount inflation does every year, to keep up with the cost of living. That means that over the course of 25 years, that $48,000/annually will become more like $87,802.20/annually. (Used inflation rates from 1990 - 2015.) You can see how quickly the value of your rents go up, while the value of your dollar goes down.


2. Isn't it better to have cash on hand, than monthly income? You're forgetting something. The value of your property increases every year with the cost of inflation as well. Let's say that each one of the properties that B. purchased, were each worth $100,000. (for easy math) Over 25 years, the value of each of those properties will increase to $182,921.26 each. This creates a net worth of $331,685.04. The 25 years it would take for this to happen, is significantly less than American A. had to work.


3. Isn't there a value to all of the time American B. saved? Passive income is powerful. Also known as Residual Income, passive income is money that comes into your accounts every month, without you having to trade any time for it. Here's a bad analogy that gets the point across. (If you work in a store, you trade 1 hour of time for $15 or so. If you own a rental, you trade an hour of time for $15/month for the rest of your life.) This takes stress off your body, and gives you several decades of extra time to make additional income, or do things you enjoy.


4. Is it realistic to think that you could accumulate 4 rentals in your working life? You could accumulate hundreds if you decided to do it full time. If you wanted to take the approach passively while working you career as well, you could acquire several dozen fairly easily over the course of 44 years.


Real Estate is not the only way you can retire comfortably. You can start a business, create good systems and standard operating procedures, and then hire out the management. Effectively creating an automated machine that produces money for you routinely. You could buy large quantities of stock that pays quarterly dividends that you could live off of. The possibilities are completely open and endless. The only thing that I know for certain is closed, is the days of cash in a savings account. If you enjoyed this blog, please like it and sign up! I am going to cover some basic financial knowledge everyone should have a couple times each week!


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